Silicon Valley Bank (SVB) Chief Executive Officer Greg Becker sold $3.6 million of the company’s shares under a trading plan less than two weeks before SVB disclosed its extensive losses that led to its failure, according to a Bloomberg report. The report said it was the first time in over a year that Becker sold shares in parent company SVB Financial Group. He sold 12,451 shares on February 27.
The crisis at Silicon Valley Bank worsened after the company sent a letter to shareholders informing that it will try to raise over $2 billion in capital after taking losses. This triggered mass sell-off in the company’s shares, which fell a steep 60 per cent in a day.
Silicon Valley Bank is a commercial bank and one of the largest in the United States. SVB has relationships with over 50 per cent of all venture-backed companies in the US and countless venture capital (VC) firms.
SVB’s financial profile benefits from an abundance of client funds, which includes on-balance sheet deposits and off-balance sheet client investment funds. Its average client funds were at a high at $348 billion in Q4 2022. Last year, the lender increased its Federal Home Loan bank borrowing in the second half of 2022, which resulted in a market funds/tangible banking asset ratio of 9.1 per cent as of December 31, 2022, whereas historically this ratio was very low. The bank’s net interest margin (NIM) declined to 2.0 per cent for Q4 2022 and a 13 per cent linked-quarter decline in net interest income.
The Crisis At SVB
SVB in 2021 saw a mass influx in deposits, which jumped from $61.76 billion at the end of 2019 to $189.20 billion at the end of 2021. As deposits grew, SVB could not grow its loan book fast enough to generate the yield it wanted to see on this capital.
The bank, therefore, purchased a large amount (over $80 billion) in mortgage-backed securities (MBS) with these deposits for their hold-to-maturity (HTM) portfolio. Almost 97 per cent of these MBS were over 10 years in duration, with a weighted average yield of 1.56 per cent.
However, with the rise in US Fed interest rates, the value of SVB’s mortgage-backed securities (MBS) plummeted. This is because investors can now purchase long-duration “risk-free” bonds from the Fed at a 2.5x higher yield. Precisely, with the rising US Fed interest rates, the value of existing bonds with lower payouts fell in value.
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